Employee Retention Tax Credit Checklist

The Employee Retention Tax Credit (ERTC) is a valuable tax incentive designed to help businesses retain their employees during challenging times. This credit was introduced as part of the CARES Act in response to the COVID-19 pandemic, and it has been extended and enhanced in subsequent legislation. As a business owner or HR professional, understanding the ERTC and how to take full advantage of it can help you support your workforce and potentially save on taxes. In this article, we will provide you with a comprehensive checklist to ensure you are making the most of the Employee Retention Tax Credit.

Determine Eligibility

Before diving into the details of the Employee Retention Tax Credit, it’s crucial to determine whether your business is eligible. To qualify for the credit, you must meet the following criteria:

1. Business Impact: Your business must have experienced either a full or partial suspension of operations due to a government order related to COVID-19, or it must have experienced a significant decline in gross receipts compared to the same quarter in the previous year.
2. Employer Size: The credit is available to businesses of all sizes. However, the rules differ depending on the number of full-time employees you had in 2019. If you had an average of 100 or fewer full-time employees, all wages paid during a qualifying period are eligible for the credit. For businesses with more than 100 employees, only wages paid to employees who were not providing services due to the reasons mentioned above are eligible.
3. PPP Loan Considerations: If your business received a Paycheck Protection Program (PPP) loan, you can still claim the ERTC; however, the same wages cannot be used for both the ERTC and PPP loan forgiveness.

Calculate the Credit Amount

Once you have confirmed your eligibility, the next step is to calculate the amount of Employee Retention Tax Credit your business can claim. Here’s how you can do it:

1. Qualifying Wages: Determine the qualifying wages you paid to eligible employees during the designated periods. For businesses with 100 or fewer full-time employees, all wages qualify. For businesses with more than 100 employees, only wages paid to employees not providing services due to COVID-19 reasons qualify. The maximum qualifying wages per employee are $10,000 per quarter.
2. Credit Rate: The ERTC provides a refundable tax credit of up to 70% of qualifying wages paid to employees, subject to certain limitations. The credit rate was increased from 50% to 70% for the first two quarters of 2021, allowing businesses to claim a higher credit amount.
3. Maximum Credit: The maximum credit per eligible employee is $7,000 per quarter, which means businesses can potentially claim up to $28,000 per employee for the entire year.

Identify the Qualified Periods

To claim the Employee Retention Tax Credit, you need to identify the qualified periods during which your business experienced a suspension of operations or significant decline in gross receipts. The qualifying periods include:

1. Full or Partial Suspension of Operations: If your business was subject to a government order that fully or partially suspended your operations due to COVID-19, the qualifying period starts from the date the order became effective and continues until the order is lifted.
2. Significant Decline in Gross Receipts: If your business did not experience a full or partial suspension, you may still be eligible for the credit if you faced a significant decline in gross receipts. The qualifying period for this scenario begins in the quarter when your gross receipts were less than 50% of the same quarter in the previous year and ends when your gross receipts exceed 80% of the same quarter in the prior year.

Keep Detailed Records

Maintaining detailed records is essential when claiming the Employee Retention Tax Credit. The IRS requires accurate documentation to support your claim. Here are some records you should keep:

1. Payroll Records: Keep records of wages paid to eligible employees during the qualifying periods, including any supporting documentation.
2. Government Orders: If your business experienced a suspension of operations due to a government order, keep a copy of the order as well as any other relevant documentation.
3. Gross Receipts Documentation: If you are claiming the credit based on a significant decline in gross receipts, gather documentation such as financial statements, sales records, or other records that demonstrate the decline.

Claiming the Credit

To claim the Employee Retention Tax Credit, you will need to report it on your quarterly employment tax return, usually Form 941. Here’s how to claim the credit:

1. Calculate the Credit: Determine the total amount of the credit for each quarter and include it on Form 941.
2. Reduce Deposits: If the anticipated credit for a quarter exceeds the employer’s share of social security tax liability, you can reduce your federal employment tax deposits by the amount of the credit.
3. Claiming Refunds: If the total credit exceeds the federal employment tax deposits, you can file Form 7200 to request an advance payment of the credit or claim the refund on your quarterly employment tax return.

Consult with a Professional

While this checklist provides a comprehensive overview of the Employee Retention Tax Credit, it’s crucial to consult with a tax professional or accountant to ensure compliance and maximize your tax savings. They can review your specific situation, help you navigate the complexities of the credit, and provide personalized guidance tailored to your business needs.

In conclusion, the Employee Retention Tax Credit can be a valuable tool for businesses to retain their employees and save on taxes. By understanding the eligibility requirements, calculating the credit amount, identifying the qualified periods, maintaining detailed records, and following the proper procedures to claim the credit, you can leverage this incentive to support your workforce and strengthen your business during challenging times.

FAQ

Q1: Who is eligible for the Employee Retention Tax Credit?

A1: To be eligible for the Employee Retention Tax Credit, your business must have experienced a full or partial suspension of operations due to a government order related to COVID-19, or a significant decline in gross receipts compared to the same quarter in the previous year.

Q2: Are businesses of all sizes eligible for the credit?

A2: Yes, businesses of all sizes are eligible for the Employee Retention Tax Credit. However, the rules differ based on the number of full-time employees in 2019. For businesses with 100 or fewer full-time employees, all wages paid during a qualifying period are eligible. For businesses with more than 100 employees, only wages paid to employees not providing services due to COVID-19 reasons are eligible.

Q3: Can businesses that received a PPP loan still claim the ERTC?

A3: Yes, businesses that received a Paycheck Protection Program (PPP) loan can still claim the Employee Retention Tax Credit. However, the same wages cannot be used for both the ERTC and PPP loan forgiveness.

Q4: How do you calculate the amount of the Employee Retention Tax Credit?

A4: To calculate the amount of the Employee Retention Tax Credit, determine the qualifying wages paid to eligible employees during the designated periods. For businesses with 100 or fewer full-time employees, all wages qualify. For businesses with more than 100 employees, only wages paid to employees not providing services due to COVID-19 reasons qualify. The maximum qualifying wages per employee are $10,000 per quarter. The ERTC provides a refundable tax credit of up to 70% of qualifying wages paid.